This guide is for a Director with a company that can’t pay a Bounce Back Loan.
In this article you’ll learn:
- About The Bounce Back Loan Scheme.
- Pay As You Grow.
- Whether you can be personally liable for a Bounce Back Loan.
- If you can strike off a company with a Bounce Back Loan.
- When you could lose your home due to a Bounce Back Loan.
Let’s get started.
What Is The Bounce Back Loan Scheme?
The Bounce Back Loan Scheme (BBLS) enables smaller businesses to access finance more quickly during the coronavirus outbreak.
The scheme helps small and medium-sized businesses to borrow between £2,000 and up to 25% of their turnover. The maximum loan available is £50,000.
The government guarantees 100% of the loan and there are no fees or interest to pay for the first 12 months. After 12 months the interest rate will be 2.5% a year.
The scheme is open to applications until 31 March 2021.
If you already have a Bounce Back Loan but borrowed less than you were entitled to, you can top up your existing loan to your maximum amount. You must request the top-up by 31 January 2021.
Eligibility For A Bounce Back Loan
You can apply for a loan if your business:
- is based in the UK
- has an annual turnover of up to £45 million
You need to show that your business:
- would be viable were it not for the pandemic
- has been adversely impacted by the coronavirus
If you want to borrow £30,000 or more, you also need to confirm that your business was not classed as a business in difficulty on 31 December 2019.
Who Could Not Apply For A Bounce Back Loan?
Businesses from any sector can apply, except:
- banks, insurers and reinsurers (but not insurance brokers)
- public-sector bodies
- state-funded primary and secondary schools
How Long Is A Bounce Back Loan For?
The maximum length of the facility depends on the type of finance you apply for and will be:
- up to 3 years for overdrafts and invoice finance facilities
- up to 6 years, for loans and asset finance facilities
What Is Pay As You Grow?
Pay As You Grow is the government’s restructuring of the repayment plans for businesses that have taken out Bounce Back Loans.
Initial Repayment Plan
The initial repayment plan was arguably optimistic, with an aspiration that businesses would start repaying the loans which were for a period of 6 years; after 12 months. The impact of Covid-19 has extended wider than initially perhaps thought and with a second national lockdown the government appears to have recognised that repayments of Bounce Back Loans may have to stretch over a longer repayment period. As a result, it has set up Pay As You Grow.
Announcement Of Pay As You Grow
The British Business Bank, the UK’s economic development bank, announced details of Pay As You Grow, which helps UK smaller businesses that have taken out a Covid-19 emergency Bounce Back Loan to manage their cash flow and have a better chance of getting back to growth.
Originally announced by the Chancellor of the Exchequer in September 2020, Pay As You Grow was originally put forward in September 2020 to enable businesses who have started repaying their Bounce Back Loans to:
- request an extension of their loan term to 10 years from six years, at the same fixed interest rate of 2.5%
- reduce their monthly repayments for six months by paying interest only with this option available only up to 3 times during the term of the Bounce Back Loan
- take a repayment holiday for up to 6 months with this option available only once during the term of the Bounce Back Loan.
Businesses that have taken out a Bounce Back Loan and who want to take advantage of Pay As You Grow can seek to use all or select some of these three options during the period of the Bounce Back Loan. The question is how rigorously will these repayment plans now be?
It is said by the government British Business Bank that lenders were due to start talking to borrowers about Pay As You Grow 3 months before repayments were due to commence. These Bounce Back Loan lenders were to inform their customers about how their repayment plans may change in accordance with the options that they select under the Pay As You Grow scheme.
Can You Be Personally Liable For A Bounce Back Loan?
Bounce Back Loans are not personally guaranteed and as a result, they are an unsecured claim in the company in Liquidation. The Directors are not personally liable for any element of a bounce back loan that has not been repaid. You can therefore Liquidate your company with a Bounce Back Loan.
However, that does not mean that a Director who has incorrectly or improperly used a Bounce Back loan will be able to simply walk away from them.
The state of the fragile UK economy is such that it is likely that many companies will default on repayment of such loans.
Not Personally Liable For Bounce Back Loan?
The liability for a Bounce Back Loan is with the limited company. The scheme is fully backed by the UK government.
There was no requirement for a company director to provide a personal guarantee. This is different to the Coronavirus Business Interruption Loan Scheme (CBILS), which was only partially government-backed with some lenders demanding personal guarantees. A Bounce Back Loan requires no such guarantees from directors.
What Happens If My Company Goes Into Liquidation?
If your company goes into Liquidation it is unlikely that the loan would be repaid in full leading to it being written off. If your Bounce Back Loan cannot be repaid then in all likelihood it will have to be closed down.
In order to close down the company one way to do that, is to go into Creditors Voluntary Liquidation. This is the procedure of going into Liquidation, typically at the initiation of the company and not its creditors. A licensed insolvency practitioner must be appointed to be the Liquidator who acts instead of the Directors under the provisions of the Insolvency Act 1986. He or she will value and then look to realise the company’s assets, repay the creditors as set out in the statutory order of payment in insolvency proceedings, to enable the company to be the subject of an orderly winding-up process.
Alternatively, the company could go into Compulsory Liquidation and a similar process undertaken but under the compulsion of having first been the subject of a Court order.
If your company does go into Liquidation, banks are ordinarily secured creditors save if they are reliant upon personal guarantees. Usually, a bank will not be without any security of any kind and often their debts are secured against company assets. Subject to the rules on distribution, they are often typically among the first creditors to be repaid from realisations of the company’s assets.
However, this is not the position where a Bounce Back Loan is concerned because there is no security provided. The loan is underwritten by the UK government who the bank can look to for repayment of the loan, not the company if there is a shortfall on liquidation.
Director’s Duties And Responsibilities
In times of normal trading, a company would not have been able to quite so easily obtain loans from banks such as those offered by the Bounce Back Loan Scheme without providing some security over the company’s assets or a personal guarantee.
In view of that, it is expected that Directors will behave responsibly when taking out such loans in accordance with their Director Duties. If information supplied to obtain the loan was found to have been misleading, then a director who provided the same could be at risk of having obtained credit improperly. Such improper conduct could amount to a breach of duty by a director, otherwise known as misfeasance. A director found guilty of misfeasance can be called upon to personally compensate the company for the loss they have caused it to suffer.
If the company was not viable as it is required to have been in December 2019, then conceivably the directors of such a company that took out a Bounce Bank Loan may be at some risk of being investigated by a Liquidator for Wrongful Trading if the company later went into Liquidation.
Tbe risk of Wrongful Trading was somewhat reduced because of legislation (The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020) introduced to suspend the Wrongful Trading provisions until 30 April 2021. However, this suspends certain periods of Wrongful Trading; it does not suspend all periods of time that the company might have been wrongfully trading. This has been explained in an earlier post called Wrongful Trading suspended again.
Can You Strike Off A Company With A Bounce Back Loan?
It is technically possible to dissolve or strike off a Limited Company with a Bounce Back Loan that is outstanding. However, it is generally not recommended because it is likely that it would be objected to, even if you do satisfy the strict criteria.
What Is The Criteria To Strike Off A Limited Company?
The criteria to strike off or dissolve a Limited Company is:
- No change of name in the last three months.
- No trading has taken place in the last three months.
- No disposal of assets for value prior to cessation of trading in the last three months prior to the application being made to dissolve the company.
- The company must not be in Administration or no processes of placing the company into Administration presently arising.
- The company must not be being wound up and placed into Liquidation.
- The company must not have an existing proposal for a Company Voluntary Arrangement outstanding or in process.
What Is Trading For The Purposes Of A Dissolution Application?
Trading is not the payment of a liability.
Why Might An Objection Be Lodged To Dissolving A Company With A Bounce Back Loan?
The reason that an objection might be lodged if you were to attempt to dissolve or strike off a Limited Company with a Bounce Back Loan is that if a company has debts that it cannot pay it is insolvent. If a Limited Company is insolvent and unable to pay its debts when they fall due there are procedures set out in the Insolvency Act 1986 that a company should go through.
An example of such a procedure is Creditors Voluntary Liquidation. A Creditors Voluntary Liquidation (“CVL”) is a procedure in which the company Directors take action to place their company into Liquidation by taking the responsible action to follow what is likely to be the correct procedure to close down the Limited Company.
A Liquidation is an orderly winding up and finalisation of a Limited Company’s affairs after it has ceased trading. It is a process that is overseen by a Liquidator.
If you attempt to bypass a Liquidation procedure by seeking to strike off your Limited Company then creditors owed money such as the Bounce Back Loan creditor that has not been repaid may consider that the correct process has not been undertaken to wind down your company.
What Happens If A Creditor Objected To My Company Being Struck Off?
If a creditor objected to the striking off of your company or its dissolution then you should typically receive from Companies House a notice informing you of this position. You would then have a number of options:
- Do nothing.
- Apply to go into Creditors Voluntary Liquidation.
- Apply to go into Compulsory Liquidation.
- Negotiate with the objecting creditor to see if further action can be avoided.
- Take professional advice.
The creditor objecting to the striking off of the Limited Company can then take action to wind up the company themselves by issuing a Winding Up Petition or issuing legal proceedings seeking a judgment to be registered against the Limited Company.
If however this creditor who is objecting to the striking off of the Limited Company does nothing, they can still usually lodge a further objection within three months of the last one and as a result, extend the period in which nothing might happen to the company for a further three months. However, it is likely that after six months if neither the company nor the creditor takes any legal steps to resolve matters either by issuing legal proceedings or to formally wind up its affairs by way of a Liquidation then the company will be dissolved at Companies House.
Could You Lose Your Home Due To A Bounce Back Loan?
If you have taken out a Bounce Back Loan you would probably be unlucky if you were to lose your home.
In order for it to happen, it is likely that a series of other matters would have to combine to cause you to lose your home rather than simply not being able to repay the Bounce Back Loan itself. Even for sole traders, the British Business Bank said:
For sole traders or small partnerships, who often risk their personal assets when borrowing, the terms of the Bounce Back Loan Scheme means no recovery action can be taken over a principal private residence or a primary personal vehicle.
Is My Home Then Protected?
Protected might be going a bit too far but the reason your home is likely not to be at risk simply because you took out a Bounce Back Loan that you cannot any longer repay, is that the bank which lent you the funds was not able to obtain a personal guarantee from you. As a result, the inability to repay the loan might lead to the company going into Liquidation but it should not result in you going into personal Bankruptcy.
Your home should also be protected because not only was the bank that gave you the Bounce Back Loan unable to obtain a personal guarantee from you as confirmed by the British Business Bank that operated the scheme for the government in its FAQs for Small Businesses: Bounce Back Loan Scheme page but also, the bank was not allowed to take a charge or security for the Bounce Back Loan over your family home.
Cannot Repay A Bounce Back Loan?
If you cannot repay a Bounce Back Loan with your company ceasing to trade and you want to close it down then we can help you with that process. We are fully licensed to enable you to consider placing a company into Creditors Voluntary Liquidation and if it is right for the circumstances. This may enable you to make a fresh start but in any event, the Liquidation can look to address the Bounce Back Loan. Contact us for a quote and free initial confidential advice.
- 1 Can’t Pay Bounce Back Loan In 2022 And Getting Stressed?
- 1.1 What Is The Bounce Back Loan Scheme?
- 1.2 What Is Pay As You Grow?
- 1.3 Can You Be Personally Liable For A Bounce Back Loan?
- 1.4 Can You Strike Off A Company With A Bounce Back Loan?
- 1.5 Could You Lose Your Home Due To A Bounce Back Loan?
- 1.6 Cannot Repay A Bounce Back Loan?
- 1.7 What Next?
- 1.8 Recent Posts / View All Posts
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